The Different Types of Business Entities in South Africa
You’ve started a business and now you are in the process of registering that business, but you are unsure of which business structure would suit you best. In South Africa there are five main types of business entities or structures to choose from, each with its own advantages and disadvantages. These include sole proprietorship; partnership; proprietary limited company; public company; and a franchise.
1. Sole proprietorship
This is the simplest form of business structure since the business is not separate from the owner. There is a single founder who owns and runs the business within a sole proprietorship. Only the owner has the authority to make decisions regarding the business. Some of the advantages of a sole proprietorship include: the owner is entitled to all the profits; it is the easiest business entity to set up; and the owner maintains 100% of the control and ownership of the business. The disadvantages are that the owner assumes all the risk for the business; meaning that should the business be in debt and unable to pay, the owner’s personal assets may be seized to pay for the debt. The owner is also personally liable for any obligations and should you want to add an owner to the business, the sole proprietorship would have to be dissolved and a new business entity will then have to be formed.
Where two or more co-owners run a business together, then there is a partnership. Partners will pool their money, share specialised skills and resources and work towards a common goal. The advantages of a partnership include access to more cash and capital; with more people comes more knowledge and expertise. Furthermore, labour is more evenly distributed among the partners, as well as the financial burden and expenses of running a business. However, there are also disadvantages, which include having to share control of the business; all partners are liable for debts no matter which partner incurs the debt; and getting out of a partnership is not the easiest process.
3. Pty Ltd – Proprietary limited company
A private company, Pty Ltd, or proprietary company is treated as a separate legal entity. Therefore, even if you start a business single-handedly, this type of business is registered as a separate legal entity. Owners of this type of entity are called shareholders. Advantages of being a Pty Ltd are that shareholders are not liable for the debts of the company; you do not have to explain your decisions nor finances to anyone; and since the business is a separate entity it will continue to run smoothly even if you sell shares or take on partners. The disadvantages of being a Pty Ltd include complying with several legal requirements and your financial statements may need to be audited annually.
4. Public company
A public company is business that issues securities through an initial public offering (IPO) and trades its stock on at least one stock exchange. The daily trading of the public company’s stock determines the value of the whole business. Shareholders can be anyone who purchases stock; therefore, anyone can become equity owners of the business. The benefits of publicly traded companies are that since shares are sold to the public, you have access to more capital and with more shareholders, it means that risk is also more spread. The challenges are that there are more shareholders, directors, and managers, therefore, making decisions takes a significant amount of time; your annual accounts are published for public inspection, and even though this improves transparency, it may prevent from guarding trade secrets or proprietary information. Finally, setting up a public company is the most challenging of all the types of business entities or structures.
A franchise is when the owner of a business licenses their business to a third party. This gives you the right to operate the business or distribute goods and/or services using the business’s names and systems, for a fee. Advantages of operating a franchise include operational support that ensures assistance while you are building and growing your business. Typically, a franchise has a successful track record and a positive reputation that you can capitalise on; and franchises usually offer training programmes designed to optimise how you run the business and bring you up to speed quickly. There are also disadvantages, and these include high costs associated with becoming a franchisee; having to pay royalties to the franchise for the use of their name and systems; and buying into a franchise requires you to follow the rules, regulations, system operations and directives of the franchise.
Your needs and the needs of your business will determine which type of business structure will be the best for you. When starting a business, you can operate as a sole proprietor or partnership and eventually grow into a Pty Ltd or public company. Use the different types of business structures to your and your business’s advantage.
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